Selling a Business to a Family Member

Baby boomers who own businesses and are looking to retire often look within their own personal networks first when considering selling a business. 

People often have an urge to deal with someone they know when it comes time to sell their business and many times the idea of selling a small business to a family member may seem like a logical choice.  Sometimes the transaction goes smoothly and there are no complications.  Sometimes, however, the deal adds significant pressure to a relationship and things can go wrong very quickly. 

This article will explore some of the negative consequences of selling a company to a family member because people usually don’t consider the worst case scenario often until it’s too late.

Determining the Selling Price
Selling your business to a relative may seem like you’re really being efficient.  The search to find a buyer is not required, there is no business for sale listing and the general inconvenience of the entire business sales process is avoided.  However, the “pain” to find a business buyer also usually results in the market determining the ‘true’ value of the business from two unrelated or unaffiliated parties dealing at an arm’s-length. 

If you sell a business to a family member, are you truly dealing with a buyer who is at an arm’s length?  Also, without showcasing the business to several buyers, how do you know that the value you are getting as the seller is maximized?  Determining the sell price of a business can be very difficult if the business is not properly listed.

Negotiating the Deal
Suppose the buyer (your relative) offers certain deal points, such as an aggressive vendor take-back term or an onerous training period.  How willing would you be to aggressively negotiate with them?  If you were dealing with an unrelated party, you may be more inclined to negotiate more intensely.  If you ‘hold back’ on negotiating with a relative as aggressively as you would have, it is possible that you will not get the full value for the business sale.

Suppose the Business Fails after the Sale
Imagine a scenario where you sell a business to a relative and the venture suffers after they take it over.  Perhaps they don’t possess the same work ethic as you, don’t have the same expertise in the operation or maybe they are unfamiliar with the area.  Example - if you sell to someone from Oakville or Burlington and you own a Toronto, Ontario business then it is quite possible that they don’t know the market well enough to be effective.  If the business does suffer after the sale, that could put an enormous strain on the relationship – which leads to the next point.

Are you Prepared for Damaged Relationships?
If the business does not go as planned after the sale, there is the potential for resentment.  The business does not even have to lose money, per se, for the relationship to suffer.  Suppose, for instance, that the business requires more work than was initially imagined or that the new owner is not as happy as he or she assumed they would be.  Prepare for the worst.

If you are ready to sell your small business please consult with a business broker or a reputable succession planning consultant to learn about your options.  Doing business with family needs to be very carefully considered before you make a final decision because there are many potential negatives you can encounter.